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Draft circular on advertising services — Ad agencies may have to fork out more service tax

Our Bureau

The implementation of the latest draft circular is likely to result in larger payout of service tax to the exchequer, say tax experts.

New Delhi , Oct. 12

THE Finance Ministry plans to bolster its service tax revenues from the services provided by advertising agencies. A draft circular issued by the Revenue Department has sought to expand the scope of the value of taxable services that would be subject to service tax in the case of advertising services.

The draft circular has now said all amounts paid by an advertising agency to the print or the electronic media (for obtaining space and time to get advertisements published, displayed or exhibited) would be counted in the value of taxable services.

The latest draft circular reverses its earlier position on the issue of inclusion of amount paid by the advertising agency to media.

The Finance Ministry had in October 1996 clarified that amount paid (excluding their own commission) to the media by the advertising agency for obtaining space and time would not be included in the value of taxable services for the purpose of levy of service tax. It was then said the commission received by an advertising agency would, however, be included in the value of taxable services.

The implementation of the latest draft circular is likely to result in larger payout of service tax to the exchequer, say tax experts.

As clients of advertising agencies, corporates may be required to bear or share the additional service tax burden arising from such a stance of the revenue department.

Advertising services were brought under the service tax net from November 1, 1996.

The Centre has budgeted service tax revenues of Rs 309 crore from advertising services for the current fiscal as compared to the revised estimate levels of Rs 278 crore of 2004-05.

The draft circular noted that the amount paid by the advertising agency to the media for obtaining space is in the nature of input service used in providing the taxable service.

"Inputs or input services are integral part of the taxable service provided and the value of all such inputs and input services is liable to be included in determining the consideration for the purpose of levy of service tax," the draft circular said.

Meanwhile, India Inc is somewhat opposed to the stance taken by the draft circular on this issue.

Some of them even contend that this is a backdoor mechanism being adopted by the Revenue Department to augment its service tax revenues.

"There will be a debate on this draft circular as many in the industry see this as expansion of the scope of levy without any actual change in law," Mr J.K. Mittal, Co-Chairman of Assocham's expert committee on indirect taxes, told Business Line.

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